FINANCIAL PLANNING FOR TRANSITION

Transcription

1 FINANCIAL PLANNING FOR TRANSITION

2 Disclaimer The information provided herein does not constitute a formal endorsement of any company, its products, or services by the Department of Defense. Specifically, the appearance or use of external hyperlinks does not constitute endorsement by the U.S. Department of Defense of the linked websites, or the information, products, or services contained therein. The U.S. Department of Defense does not exercise any editorial control over the information you may find at these locations. This information provides informational resource material to assist military personnel and their families, to assist in identifying or exploring resources and options.

3 Purpose Understand and be able to plan for the changes and impact transitioning from the Service will have on personal finances. Participant Guide pg 1

4 Discussion Agenda Financial Goals Income Debt Expenses Assets Action Plan Resources 1

5 Financial Goals LEARNING OBJECTIVE: Define short-, medium- and long-term financial goals Determine short-, medium-, and long-term financial goal/s SECTION 1: Financial Goals 2

6 Financial Goals Short-term: less than 2 years Medium-term: between 2-5 years Long-term: over 5 years 3

7 4

8 Income LEARNING OBJECTIVES: Determine current military salary with compensation Compare current military salary to civilian equivalent to predict future salary requirements Compare compensation packages between companies SECTION 2: Income 6

9 Income Definitions Total pay + allowances = Gross Income Gross income tax/insurance/ retirement deductions = Net Income You can think of net income as the amount of money you take home from each paycheck. 6

10 Leave and Earning Statement LES: Entitlements Base Pay BAS BAH Fly Pay COLA Dive Pay 7

11 Spending Plan Update Income: Income from LES Spouse income Income from additional sources Complete the Income (tab 2, 3 & 4) on the worksheet 8

12 Civilian Equivalent Salary B. Hardy: - Separating, E-5 - Single - Washington D.C. Current Salary: - $32,800 - $62,000 with BAH, BAS Civilian Equivalent: - $65,900 9

13 Civilian Equivalent Salary H. Smith: - Retiring O-5 - Married 2 children - San Antonio Texas Current Salary: - $108,000 - $136,000 with BAH, BAS Civilian Equivalent: - $143,871 10

14 Expenses LEARNING OBJECTIVES: Create a list of current expenses and utilize a method to track expenses Compare cost of living at current and 2 nd location Determine changes in taxes based on future salary requirement and location Navigate resources available Describe the basics of health insurance Generalize the basics of life insurance SECTION 3: Expenses 13

15 Living Expenses 13

16 Track Spending Track spending for 2-4 weeks Record all expenses daily or weekly using receipts Use a paper/pen, spreadsheet, notebook, or an APP (Track it, Dollarbird, Fudget, etc.) Review past credit card or bank statements 14

17 Spending Plan Update Estimate Expenses: Household Utilities Transportation Food (Groceries/Dining Out) Clothing/Personal Complete the Insurance Income (tab 2, 3 & 4) on the Leisure worksheet 15

18 Living Expenses NEW EXPENSES 15

19 Cost-of-Living Changes When transitioning, consider what could impact your financial plan: Salary Housing Utilities Taxes (including tax benefits for veterans) Food Child care Commuting costs, clothing, entertainment, school costs, climate, health insurance 16

20 Taxable vs Non-Taxable Taxable Base Pay CONUS Cola Non-Taxable BAH BAS Clothing Allowance OCONUS Cola DLA FSA Per Diem TLA 20

21 TAXES Federal Taxes FICA, Medicare, Social Security Taxable Income State Income Tax County or City Tax Automatic extensions Property Taxes 20

22 Determine Your Taxes SEPARATING: Determine the amount of taxes you currently pay using your taxable income from your LES Determine the tax amount of ALL your income (including non-taxable income) Determine the tax amount with the civilian equivalent salary Choose a secondary location Write the information in the space provided Provide additional notes as needed 22

23 Determine Your Taxes RETIRING: Estimate pre-tax retirement pay using Retirement/High-36-Calculator/ GO TO: Choose the state you wish to retire in Complete the following information: SS = $0 (if not drawing SS) Annual Retirement = military retirement Annual wages = amount needed to close the gap between retirement pay and civilian salary equivalent Location = zip code Year of birth Filing Status 25

24 Health Care Choices After Transitioning Separating from Active Duty Transitional Assistance Management Program (TAMP) 180 days, premium-free Eligibility dependent on type of discharge Continued Health Care Benefit Program Up to 18 months--can be used after TAMP expires Quarterly premiums to be paid Enrollees responsible for co-pay and deductible Retiring from Active Duty Tricare for Military Retirees Must enroll within 30 days of retirement date Annual enrollment fees 26

25 Civilian Health Insurance Individual or Single Family Purchased from the insurance company or marketplace May be more expensive Health questionnaire or physical exam may be required More choices on coverage plans Group Negotiated group rate, generally through employer Less expensive No individual within the group can be denied coverage Limited choices on plans 27

26 Healthcare Terms Co-Insurance Co-payment Deductible In-Network Cost Out-of-Network Cost Out-of-Pocket Cost 28

27 Types of Plans Preferred Provider Organizations (PPO) Health Maintenance Organizations (HMO) Exclusive Provider Organization (EPO) Point of Service (POS) Catastrophic Plan 29

28 Life Insurance Types of Life Insurance: VGLI Term Life Insurance Universal or Whole Life Insurance 31

29 DEBT LEARNING OBJECTIVES: Create a complete list of debts owed Determine debt-to-income ratio as it relates to the financial wellbeing scale Interpret credit report and credit score Analyze the impact of credit score on transition How to correct errors on credit report SECTION 4: Debt 34

30 What is Your Debt? Debt: an amount that is owed to another individual or bank Calculate your debt: determine to whom you own money and the minimum payment due each month, along with the interest rate 34

31 Spending Plan Update Debt: Mortgage Car Payments Credit Cards Bank, department stores, Military Star Card, etc. Loans Personal, student, consolidated loans, etc. Advance payments Military organizations, family, friends 35

32 Debt-to-Income Ratio Total minimum monthly payments $1,725 Gross monthly income (pre-taxes) $4,750 = The debt-to-income ratio calculation : = x 100 = 36 DTI: 36%. 36

33 Debt-to-Income Ratio Under 33% - Good debt at this level is considered manageable by creditors 34% - 49% - still manageable but is based on personal financial circumstances; consider ways to lower DTI Above 50% - over half of income is going to debt which may limit the amount of credit available 37

34 Spending Plan Update Debt-to-Income Ratio: Add your debt-to-income ratio to your spending plan 38

35 Credit Scores What is a Credit Score? Why Should I Care? How Do I Influence My Score? Three digit number generated by a mathematical algorithm based on information in your credit report FICO Most common FICO Range : Influences what credit products will be available to you and the cost of those products Lower scores = overall higher cost; or even inability to obtain credit 65% based upon payment history and amount owed Pay on time Keep balances well below credit limit Check your report and correct errors 38

36 FICO Score Components Fair, Isaac & Company (FICO) 10% 10% 35% 15% Payment History Amounts Owed Length of Credit History Credit Mix New Credit 30% 39

37 Credit Report Viewing (Who and Why) 40

38 Analyzing Your Credit Report & Score 41

39 Fair Credit Report Act Provides protection to the consumer by regulating the collection, dissemination and use of consumer information. It does this by: Giving you the right to know what is in your credit report and given a chance to dispute Not having incorrect or outdated information remain on your credit report Consent must be given for credit reports to be provided to most Ability to seek damages if there is a misuse of the credit report 43

40 Improving A Score 44

41 Correcting A Report Step Use online credit report dispute process provided by each of the credit agencies: TransUnion Experian Equifax More complex: use FTC website for instructions and sample letters Step 2 3 Consumer Financial Protection Bureau (CFPB) can also assist in resolving errors 45

42 Credit Report Clean up Public Record Information Explain Damaging Items Accurate Negative Information - 7 years for negative information - 10 years for bankruptcy AVOID Credit Repair Agencies 46

43 ASSETS LEARNING OBJECTIVES: Define assets and calculate value of personal assets Calculate net worth as it pertains to assets and evaluating current financial situation Illustrate the difference between a defined-benefit plan and a defined- contribution plan Analyze options available for TSP when transitioning Identify common vesting schedules SECTION 5: Assets 49

44 What is an Asset? According to Dictionary.com: Items of ownership convertible into cash; total resources of a person or business, such as cash, notes and accounts receivable, securities, inventory, goodwill, fixture, machinery or real estate 49

45 Savings & Investments 50

46 Retirement Plans Defined Benefit Plan Traditional company pension plan; ultimate retirement benefit is definite and determinable as a dollar amount Examples: Military Retirement Pension Funded mostly by the employer Responsibility for payment of the benefit & risk on funds invested rests with the employer 51

47 Retirement Plan Defined-Contribution Plan the contribution is defined yet the ultimate benefit to be paid is not Examples are 401(k) and 403(b) plans, TSP, SIMPLE IRA, Roth IRA, SEP, Employee Stock Ownership (ESOP), and profit sharing Contributions are from the employee A portion may/may not be matched by employer Each participant has an individual account The benefit at retirement depends on amounts contributed + investment performance of account Investment risk may rest solely with the employee due to opportunity to choose from a number of investment options 52

48 Blended Retirement System Combines a defined-benefit pension plan with a government matching of TSP funds, up to 4% If transitioning during 2018 need to determine: - eligibility for BRS - financially beneficial Returning as Reservist will be under Legacy with option to change to BRS. For more information visit: 52

49 Thrift Savings Plan (TSP) Options Leave funds in TSP account (if balance is more than $200) Transfer your TSP into another eligible account (i.e., IRA, civilian 401k) Transfer your TSP account into a qualified annuity Withdraw your TSP funds completely Contact TSP: (1-TSP-YOU-FRST) Some funds may include tax-exempt contributions! 53

50 Early TSP Withdrawal Withdrawal is subject to both income tax and, if the employee is under age 59½, the early withdrawal penalty tax of up to 10%. Cost of Early Withdrawal Example: $10,000 withdrawal - $2,000 (taxes) - $1,000 (early withdrawal penalty 10%) = $7,000 actually amount received 54

51 Net Worth Assets: What You Own Liabilities: What You Owe Resources for estimating net worth:

52 Spending Plan Update Assets: Current cash amount in saving/checking Estimate current value of house/home/real estate Estimate current value of car, jewelry Complete the Estimate Income current (tab value 2, 3 & of 4) on the worksheet TSP, mutual funds, stock, bonds, etc. 59

53 Social Security and Retirement Social Security entitlement is based on age and amount withheld from paycheck during your working life Open a My Social Security Account Social Security Administration Retirement Estimator Age to begin withdrawal from annuities chart 61

54 ACTION PLAN LEARNING OBJECTIVES: Create a plan containing next steps in the financial journey to prepare for transition Identify reliable financial resources after transition Interpret information to discover possible scams SECTION 6: Action Plan 62

55 Action Plan 63

56 Action Plan Ways to increase income: Ways to decrease expenses: Ways to decrease indebtedness: 64

57 Preparing for Transition Visit Base Legal to update: Will Power of Attorney (POA) Trusts (as needed) Medical directive or medical POA Living Will Ensure information on designated beneficiaries is current and correct No longer protected by: Service Member Civil Relief Act Military Lending Act IRS special tax breaks 67

58 Accessing mypay Time to access: Separating 13 months only Retiring 13 months for statements from in service period New Login credentials will arrive when your retired pay account is established To maintain access: Log on using a personal device to: Update and physical address Update security questions and review personal settings Print/save a copy of all W2s for the last 13 months 68

59 Pre-Transition Resources 70

60 Post-Transition Resources *This does not constitute a formal DoD endorsement of any company, its products, or services.* 70

61 Financial Planning Wrap Up Final Steps: ITP: Complete Block 1: Section C in your ITP for financial planning CRS: Complete a post-separation budget Make an appointment with installation financial counselor, if necessary Complete the Transition GPS Participant Assessment: Financial Planning for Transition